do you need GAP insurance?
What Is GAP Insurance?
Comprehensive insurance coverage is a must if you have a car. Accidents and collisions can have a significant impact on both your physical and financial health as it is, and this is worsened by still owing money after the fact. Most car insurance policies only cover the car's actual value at the time of a claim, which can still leave you with a significant deficit if you are still early in the process of repaying your auto loan. The last thing you want to do is spend another couple of years paying off an auto loan for a car that you can no longer drive or may not even have anymore.
To avoid this situation, or at least provide some relief, you may want to consider Guaranteed Asset Protection (GAP) insurance. GAP insurance protects you if your car is totaled or stolen before you have paid off your auto loan. It works alongside other insurance products such as collision and liability insurance. While GAP insurance is a beneficial product, it isn’t a good purchase for everyone. So, do you need GAP insurance?
GAP insurance is an additional insurance product that covers any difference between the car's actual cash value (ACV) and any outstanding amount of an auto loan. For example, let’s say that you have an auto loan of $25,000. You are in an accident, and you totaled your car. If the ACV of your vehicle is $20,000, your insurance company will pay out that amount less your deductible. If the deductible is $700, then you would receive $19,300. However, you could still owe $5,700 on your auto loan. Therefore, your GAP insurance would kick in and pay the $5,700 difference between the ACV of your vehicle and the outstanding loan. On the other hand, if you don't have GAP insurance, you would still be required to pay the loan's outstanding balance. And, of course, you would still need to raise finances to purchase a new car.
Is GAP Insurance For You?
While GAP insurance is a relatively inexpensive add-on to your existing insurance, it might not make sense to purchase it in some cases. Here are some key factors to consider when deciding whether you need GAP insurance.
If you have taken out an auto loan of longer than five years, then GAP insurance makes a lot of sense. For loans with longer terms, the ACV of the car may be less than the outstanding amount of the loan. GAP insurance helps cover that difference. GAP insurance can be canceled at any time, so once the outstanding loan amount is less than the ACV, you can cancel the insurance and save yourself some money every month.
If you made a sizable down payment on your vehicle, then GAP insurance may not be necessary. Typically, consumers who make a larger down payment will take a short-term loan that will be paid off in 2–4 years. However, suppose your down payment was less than 20% of your car’s value. In that case, GAP insurance makes sense as you are entering into a longer-term loan with smaller monthly repayments, increasing the likelihood that the loan's value will be greater than the ACV of your vehicle.
Speaking of depreciation, the ACV of a car drops the moment it leaves the dealership. Typically, a vehicle will depreciate by about 49% of its value over a five-year period, especially in the case of luxury cars. Therefore, if you take out a substantial loan to buy a brand new luxury car, GAP insurance could save you from a massive financial hit if it gets totaled.
Time on the road
If you spend a lot of time on the road each year, you are statistically more likely to have an accident. Likewise, the extra miles on the odometer will cause the ACV of your car to decrease because your vehicle may require additional maintenance throughout the years. In this case, GAP insurance is a sound investment.
How Much Does GAP Insurance Cost?
GAP insurance costs vary significantly between insurance companies, so it is wise to shop around before choosing a policy. Your existing car insurance provider is an excellent place to start, as they may be able to add GAP insurance to your policy for only a slight increase in the payments you are already making. Car dealerships will usually offer GAP insurance policies, but they tend to be more expensive than what you can expect from other sources. Banks, credit unions, and insurance companies are other places to contact for a quote. The actual cost will be calculated based on the ACV of your vehicle, your age, location, and car insurance history. So, again, it makes sense to compare prices before purchasing GAP insurance.
Do You Need Gap Insurance? Find Out With ALEC!
At ALEC, we understand that purchasing a car represents a significant investment and that you also need to prepare for a rainy day. We offer a wide range of loans at highly competitive rates, with flexible terms and no prepayment penalties. In addition, we provide our members with loan protection products, including nationwide breakdown insurance coverage and GAP insurance.